Skip to content

FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A treasurer notes that a large share of the bank's repo funding is secured by a narrow set of securities, which are all pledged to the same few lenders. Which risk is the treasurer primarily identifying?

The treasurer is identifying asset encumbrance and collateral concentration risk. Heavy pledging of a narrow set of securities to a few lenders leaves fewer unencumbered assets available as a liquidity source and makes funding dependent on those lenders and that collateral type, especially under stress.

  1. AAsset encumbrance and collateral concentration risk, which reduces available unencumbered liquidityCorrect
  2. BBasis risk between the repo rate and the overnight index swap rate
  3. CSettlement risk arising from time zone differences
  4. DModel risk in the calculation of value at risk

Explanation

Pledging the same securities to few lenders encumbers those assets, so they cannot be used for other funding, and concentrates dependence on a few lenders. The other risks may exist but do not describe the concentration of pledged collateral.

Did you get it right without looking?

One question tells you little. A timed set on Repurchase Agreements and Financing shows your real accuracy, how long you take and where you lose marks.

Practise Repurchase Agreements and FinancingFree diagnostic mock

More Repurchase Agreements and Financing questions